The deficit target was raised to 5.2 percent of gross domestic product in the year through March from 4.8 percent estimated in October, Gordhan said in his budget speech in Cape Town today. The government will cut spending to help bring the shortfall down to 4.6 percent next year, compared with an earlier projection of 4.5 percent, and 3.9 percent in 2014/15…

South Africa will miss its revenue target by 16.3 billion rand ($1.8 billion) this year and reduce spending by 10.4 billion rand in the next three years, Gordhan said. The state will limit expenditure growth to an average of 2.3 percent a year from 2.9 percent previously…

The economy will probably expand 2.7 percent this year, lower than the 3 percent estimated in October, Gordhan said. That’s less than half the pace the 7 percent pace the government says is necessary to slash the jobless rate to 14 percent by 2020 from 25 percent currently.

As a result, South African assets are being pounded today. The U.S. dollar has gained 0.2% against South Africa’s rand, on a day when it is falling against most other emerging-market currencies. The FTSE/JSE Africa Top40 Tradeable Index, meanwhile, has dropped 0.8%, and the iShares MSCI South Africa Index (EZA) has dropped 1.1% to 65.39, led by losses in companies like AngloGold Ashanti (AU), which has dropped 2.3% to $25.07 today, and Gold Fields (GFI), which has plunged 3.3% to $8.61.

Worse yet: There’s little hope of change on the horizon, says Brown Brothers Harriman’s Win Thin. He expects the South African Reserve Bank to take action.

With fiscal policy becoming more restrictive with the spending cuts, it is fully on the shoulders of SARB to keep the macroeconomic balance. Their task, however, is made more difficult by still-high inflation. CPI did ease to 5.4% y/y in January from 5.7% y/y in December, but still remains near the top of the SARB’s 3-6% target range. Core inflation has been at 5% y/y for the past four months, which is the cycle peak. We do think that the central bank will have little choice but to cut rates again this year. PPI inflation has eased to around 5% y/y from a peak near 11% in late 2011, suggesting pipeline price pressures are in a downward trajectory and will allow the SARB to eventually cut rates.

But don’t expect the rate cuts to do much to boost growth.

Risks to the forward looking forecasts are obviously tilted to the negative side, as South Africa continues to grow very sluggishly. Indeed, spending cuts at this period will likely have the limited benefits for the budget numbers since the ensuing headwinds on growth will hurt revenues.

And sluggish growth could lead to South Africa’s credit rating being slashed, Thin says.

Our own sovereign ratings model has South Africa at BBB-/Baa3/BBB- vs. actual ratings of BBB/Baa1/BBB. These updated forecasts from Gordhan may be a trigger for further downgrades that we feel are warranted. If the agencies are feeling generous, they may wait some months to see how the macro picture evolves, but whatever the timing, we do not think South Africa can avoid more downgrades ahead.

With unemployment stuck near 25%, investors can also expect more labor unrest, Thin says.

Political risk will come mainly from the trade unions, as workers have gotten tired of stagnant wages and perceived corruption as the management and political levels. Some of the more radical factions in the ANC may see their influence rise in response. All of these ingredients suggest that the risks to the fiscal outlook remain very negative going into 2014.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.